A confluence of macroeconomic factors and a profound shift in the goals of corporations since the global financial crisis have dramatically accelerated corporate plan sponsors shifting defined benefit pension risk off their balance sheet through pension risk transfers.
One significant macroeconomic event has been the dramatic decline in interest rates. For example, the U.K. 10-year bond yielded only 1.08% at June 30, 2016, down from 4.69% at the end of 2007.
The decline in interest rates has increased the liabilities of pension funds that mark to market. In 2008, the liability for the 100 largest corporate U.S. plan sponsors was about $1 trillion. In 2016, the amount had increased to $1.4 trillion even after a meaningful amount of pension risk transfers.
There has also been a long-term trend of participants living longer, creating ever-growing liabilities. According to the Office for National Statistics, a female born in England in 1991 is expected to live to 79. A female born in 2014 is now expected to live to 83.
According to the U.S. Bureau of Economic Analysis, corporate profits sharply rebounded from the Great Recession and have been running at all-time highs since 2010.
With flush bank accounts and memories of the pain that pension funds inflicted on balance sheets, many corporations have chosen to permanently remove the risk by engaging in a risk transfer.
Pension risk transfers have come in different sizes and shapes. In the U.K., many plan sponsors have chosen to eliminate the risk of participants living longer than actuaries originally forecast. Pensions & Investments has reported on 20 longevity swaps in the U.K. insuring almost $90 billion in liabilities. The BT Pension Scheme entered into a $27.4 billion longevity swap, which was reinsured by Prudential Insurance Co. of America.
In the U.S., many plan sponsors have made lump-sum offers to participants. P&I has tracked almost 125,000 participants accepting lump-sum offers.
Plan sponsors in both the U.K. and U.S. have transferred assets and liabilities to insurers through buy-ins and buyouts. The U.S. has accounted for about 60% of the $100 billion that has been transferred. General Motors entered into the largest pension buyout with Prudential, a $29 billion transaction.